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Home Finance Economic sustainability: An approach with two levels

Economic sustainability: An approach with two levels

by Jessica Weisman-Pitts
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iStock 1355654473

Economic sustainability: An approach with two levels

John Barber, VP Europe, Infosys Finacle

The transition of sustainability from  being just a trend to an important boardroom discussion was a gradual process. Nevertheless, it’s indisputable today that sustainability is central in the considerations of major corporations, institutions, and governments.

Last year’s COP27 conference in Sharm El-Sheikh, Egypt marked a significant milestone, providing a much-needed boost for sustainable practices as it laid out frameworks, objectives, and stringent accountability measures to be embraced by nations worldwide.

While governments are taking substantial steps towards sustainable practices, the results of their actions will only be seen after some time. In contrast, due to their efficiency, productivity, and relative agility compared to government institutions, industry and commerce are better positioned to drive this more swiftly. Consequently, it’s encouraging to see that today, the ESG (Environmental, Social, and Governance) programmes and the initiatives of most large organisations are not only part of boardroom discussions but are also integrated into annual reports, investor presentations, stakeholder communication, and even public advertising.

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However, sustainability in the banking sector has recently come under scrutiny for not doing enough to promote sustainability awareness within their organisations or through their lending policies to encourage environmentally responsible business practices.

The journey for them towards a truly sustainable operation is a lengthy one, demanding patience and persistence. Still, banks that strive for improvements in this area will eventually experience the benefits of their efforts.

While much has been written about the need for banks and financial institutions to lead in sustainability and ESG efforts, this article focuses on immediate action areas that institutions of various shapes and sizes can work on to create a positive impact, both directly and indirectly.

Opportunities for financial sustainability within banks and beyond can be categorised into two levels. The first involves implementing ESG standards and goals within the banks themselves. The second is how banks’ ESG values are reflected in their external policies, particularly in lending, to encourage their entire ecosystem to adopt a more sustainability-focused approach and create a positive impact on society.

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Considering the current state of most banks in terms of sustainability, there are numerous opportunities for them to make a meaningful impact at both levels. A 2021 CDP study highlighted that a bank’s own emissions are insignificant compared to the emissions funded by them, which can be as high as 700 times their own. This emphasises the need for banks to not only improve their internal sustainability practices but also give significant attention to the difference they can make by lending to and encouraging sustainable businesses in the economy.

Driving sustainability within banks involves a range of areas where the measurement, monitoring, and enhancement of sustainability factors can yield substantial results. While each bank’s specific circumstances, evolution, and ESG priorities may differ, there are certain ESG action areas that they can effectively address through technological innovations and digitalisation.

Banks can drive sustainable behaviours within their ecosystem in four ways:

  1. Sustainability through conscious lending: Banks can influence sustainable development by preferentially lending to projects and businesses aligned with their own sustainable growth goals. This conscious lending not only supports these initiatives but also contributes to multiple United Nations Sustainable Development Goals, creating a positive impact on the environment and local communities. Here are some examples of how banks offer lending to promote sustainabiity throughout the world:
  • Eco-friendly home loans: The Co-operative Bank in the United Kingdom provides eco-friendly home loans, designating a portion of the financing specifically for energy-efficient home upgrades.
  • Vehicle financing for energy efficiency: Wells Fargo in the United States gives tailored financing solutions for energy-efficient vehicles.
  • Solar power financing: Bank Australia offers favourable loan terms for installing solar panels.
  1. Sustainability through other products and services: Banks can use their portfolio of products to encourage sustainable choices among customers and reward them for embracing a more eco-conscious lifestyle. Some examples are:
  • Environmentally conscious investment portfolios: Goldman Sachs provides “GS SUSTAIN” funds, which allocate investments to companies at the forefront of sustainability and ESG practices.
  • Carbon emission compensation: HSBC offers a programme for carbon offsetting, allowing customers to counterbalance their carbon emissions by investing in renewable energy and reforestation initiatives.
  • Eco-friendly investment bonds: The European Investment Bank (EIB) is a prominent issuer of eco-friendly bonds, funding projects like renewable energy and sustainable transportation.
  1. Sustainability through ecosystem influence: Banks, being central to commercial and business ecosystems, can influence these through their actions and policies.
  • Corporate responsibility reporting: Citigroup, DBS, Bank of America, and HSBC release annual reports that provide comprehensive insights into their sustainability practices and the resulting impact. These reports set a standard for how businesses, particularly in the financial sector, can effectively incorporate sustainability while maintaining profitability.
  • Selection of partners and suppliers: Banks like BNP Paribas and ING have established sustainability criteria for their suppliers, partners, and vendors. These criteria encompass assessments of their operations and products’ environmental and social consequences, along with encouragement to adopt sustainable practices.
  • Stakeholder well-being initiatives: JP Morgan Chase, Citigroup, HSBC, and Bank of America have all developed robust stakeholder well-being programmes. These initiatives cover a wide spectrum, from health and wellness endeavours to building diversity and inclusion, ensuring financial welfare, and facilitating access to affordable housing.
  1. Far-reaching influence on sustainability: Financial sustainability is not just about what banks do to be more sustainable but also about how they can influence their entire ecosystem to embrace sustainability as a way of doing business and living. Banks that lead this charge using technology are poised to be leaders in the near future.
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